UK could water down Patent Box after Germany compromise

THE UK’s Patent Box regime could be watered down following a compromise reached with Germany, over the alleged competitive advantage it gave Britain over its fellow EU member states.

The tax incentive for research and design work undertaken in the UK was the target of an investigation last year by the European Commission over potentially harmful tax competition.

The policy has proved popular since coming into effect in April 2013, with major pharmaceuticals business GlaxoSmithKline (pictured) relocating 150 overseas research projects to the UK in order to take advantage of the scheme.

The proposed altered regime – which will need to be ratified by the G20 and OECD – will require tax benefits to be connected directly to R&D expenditures, the treasury said. There will be amendments, too, to issues in relation to qualification of expenditures, grandfathering and tracking qualifying R&D expenditure.

“Constant chopping and changing” of reliefs damages the certainty businesses require, according to BDO tax partner Richard Rose.

“The taxation benefits from the UK’s patent box regime are likely to be curtailed if a compromise proposal by the UK and Germany, that is to be put before the G20 and OECD, is adopted. The compromise may lead to the end of the UK’s current patent box regime but with an option for UK businesses to grandfather intellectual property already in the existing regime,” he said.

Grant Thornton national head of tax Jonathan Riley added: “Recent OECD announcements on the base erosion profit shifting BEPS exercise and its ambitious plans to create a global tax system have mainly centred on the multinational company IP market and the notion that they can choose to locate and exploit their IP wherever they are offered the best overall tax package.

“Today’s announcement clearly plays to that agenda and seeks to place the UK in the ‘good tax citizen’ camp, even though it does have a negative effect on our tax competitiveness.”